Greek Election Gridlock Raises Risk for Bailout, Euro Future

The head of Greece's Syriza party, the second-largest after the May 6, 2012 election, Alexis Tsipras (C), celebrates with supporters in the center of Athens on May 6. Photograph: Louisa Gouliamaki/AFP/GettyImages

May 7 (Bloomberg) -- New Democracy leader Antonis Samaras
is trying to put together a government after a Greek election
that raised fresh questions about the country’s euro membership
and triggered the biggest stock-market rout in four years.

Samaras will be given three days from today to put
together a coalition from an assembly split down the middle on
whether to renege on the terms of bailout agreements negotiated
since May 2010. New Democracy and the socialist Pasok party,
enemies until the country’s crisis threw them into a national
government together this year, are two seats short of the 151
seats needed for a parliamentary majority.

As voters across Europe rebel against austerity measures
imposed to stamp out the debt crisis, Citigroup Inc. said today
that the risk of Greece leaving the euro by the end of 2013 has
risen as high as 75 percent. Yesterday’s election propelled into
parliament one party that wants to put land mines on the border
with Turkey to stop illegal immigrants and another that wants
Germany, the country’s biggest donor, to pay World War II
reparations. The benchmark ASE Stock index plunged 6.3 percent
at 1:01 p.m. in Athens.

‘Leave the Euro’

“The risk is huge that Greece will not have in the near
future a government ready and able to fully continue the current
adjustment program,” Holger Schmieding, chief economist at
Berenberg Bank in London, said in an e-mailed note. “The Greek
result adds to the risk that Europe could turn off the flow of
support funds and thus force Greece to leave the euro.”

Samaras may focus his advances on the Democratic Left,
which won 19 seats in the parliament and rejects austerity
measures yet is in favour of remaining in the euro. For now
Democratic Left has indicated it doesn’t want to join a
government with New Democracy and Pasok.

Should Samaras fail to get the necessary number of seats,
the onus on forming a government will fall to bailout opponent
Syriza, which came second in the election with 52 seats. After
that, Pasok, which won 41 seats, gets a go. If the nine-day
process fails to yield a coalition, President Karolos Papoulias
may then try to broker a government of national unity. Should
that process fail, new elections may be a possibility.

Even if a new government is formed, it may not survive for
long, said Spyros Economides, a senior lecturer at the London
School of Economics.

“How long will they be able to cohabit?” Economides said
in a phone interview. “The question is, if you’re a supporter
of the pro-European line, can you get the sticky-tape out and
hold them together for 6 months or are you going to have a
second election before the summer?”

Left Party Surges

Syriza, a coalition of left parties, has vowed to
cancel the bailout terms.

“I asked for a strong mandate,” Samaras said in Athens
yesterday. “The people decided otherwise.”

As leader of the biggest party, Samaras is due to receive a
three-day mandate today to try and form a government. He meets
the president at 3 p.m. local time. He’s due to meet the leaders
of Pasok and Syriza later in the day.

Euro Falls

Greece’s ASE Stock Index dropped as much as 8.3 percent to
632.77 points, close to the 20-year low of 626 hit in January.
Shares of EFG Eurobank SA and Alpha Bank SA fell more than 18
percent. National Bank of Greece SA, the nation’s largest
lender, dropped more than 14 percent. The euro also fell as
French socialist Francois Hollande defeated Nicolas Sarkozy in
the country’s presidential election yesterday. The single
currency dropped 0.4 percent to $1.3027.

With anti-bailout rhetoric benefiting parties as diverse as
Golden Dawn, which wants land mines along Greece’s borders to
halt immigrants, and Independent Greeks, which wants Germany to
pay compensation for World War II war crimes, Pasok and New
Democracy’s coalition partners are limited. Democratic Left
might be convinced to join because of its more clearly European
orientation, said Lefteris Farmakis, a strategist at Nomura
International Plc in London.

“It’s the only realistic coalition partner,” he said.

The Communist Party won 8.5 percent, according to the
latest projections, and will get 26 seats. Anti-immigrant Golden
Dawn got 7 percent of the vote with 21 seats, entering
Parliament for the first time.

Anti-Bailout Success

The success of anti-bailout parties in the Greek election
may spark speculation about the country’s ability to push
through the cuts needed to ensure funds keep flowing from
Europe. At the same time, European taxpayers now hold the bulk
of the country’s debt, meaning governments may have little
option but to keep the country’s finances afloat.

Of Greece’s 266 billion euros ($347 billion) of debt, about
194 billion euros -- or 73 percent -- is held by the European
Central Bank, euro-area governments and the International
Monetary Fund, according to the Greek Debt Management Office in
Athens. In 2010, before the first bailout, Greece owed about 310
billion euros, all to the private sector.

Austrian Chancellor Werner Faymann became the first major
European leader today to reopen the debate about Greece’s
membership of the euro, a tactic that the head of Syriza
dismissed as blackmail during the election campaign.

Free to Quit Euro

“Every country can decide to leave the common euro area,
of course Greece can as well,” Faymann told Austrian state
radio ORF. “You just have to know what it means -- and the
Greeks will have to consider that.”

Alexis Tsipras, the head of Syriza, said voters had given
him a mandate to renege on bailout agreements negotiated with
the EU and the International Monetary Fund.

“The people of Europe can no longer be reconciled with the
bailouts of barbarism,” Tsipras, 37, said on state-run NET TV
late yesterday. He said he would begin talks with parties of the
Greek left to achieve that goal. The head of the Communist
Party, Aleka Papariga, said she won’t team up with Syriza.

New Democracy and Pasok, which have alternated in power
since 1974, were partners in the outgoing caretaker government
of Prime Minister Lucas Papademos, which secured a second rescue
package earlier this year, saving Greece from financial
collapse.

Under the terms of that 130 billion-euro package, which was
accompanied by the biggest debt restructuring ever,
international lenders expect to hear in June how Greece will
achieve 11.6 billion euros of savings for 2013 and 2014.

The Greek election result came amid unemployment of almost
22 percent and a jobless rate of almost 51 percent for those
under the age of 24.

Voter turnout was 65 percent, the Interior Ministry said on
its website.